Ofwat today published for consultation its proposal to fine United Utilities Water £8.5 million for non-compliant trading arrangements with associate companies.

This is the first time that Ofwat has proposed to impose a fine on a water company for non-compliance with transfer pricing (intra-group trading) rules. The size of the proposed fine reflects the seriousness with which Ofwat views the failure by United Utilities Water to comply with its licence conditions.

Under its licence United Utilities Water must market test for services that it procures from companies within the United Utilities group. But the north west water company has repeatedly breached its licence by failing to do this. Market testing enables water companies to obtain the best combination of price and quality of service for their business needs.

Failing to market test has the potential for customers to pay higher prices than would otherwise be necessary. However, Ofwat has already adjusted the water company's price limits downwards in 1999 and 2004 because of intra-group trading to protect consumers from paying higher costs.

Ofwat's proposed fine relates to breaches that have taken place between October 2005 and March 2007. They relate to United Utilities Water's trading arrangements with Vertex Data Science, United Utilities Facilities Management, United Utilities Property Solutions, United Utilities Networks and Your Communications (later THUS Group Plc).

Philip Fletcher, Ofwat Chairman, said:

"We take these breaches very seriously. Our job as regulator is to protect customers by ensuring they pay the minimum necessary for high quality sustainable water services. This depends on Ofwat being able to measure accurately companies' costs when it sets price limits. This is made very difficult when water companies fail to establish transfer prices in line with current market rates.

"We have warned United Utilities Water over several years and reduced their price limits at successive reviews to protect customers. Despite this the company has continued to trade with associates in a way that if left unchecked has the potential to harm customers' interests.

"We consider the proposed fine to be a proportionate response. It sends a clear message that water companies must comply with their licence conditions. This ensures the regulatory regime is not undermined to the disadvantage of customers."

In December 2006 United Utilities Water provided Ofwat with a legally binding undertaking to make changes to its trading arrangements with its associate companies by 30 April 2007 to ensure these complied with its licence. Ofwat is monitoring the company's progress in delivering the undertaking and its future trading with its associates.

Ofwat has given interested parties 28 days to respond to the proposal. It will then take a final decision in this case. Consultation